By Francesco Canepa and Balazs Koranyi
FRANKFURT (Reuters) -A million-dollar question will hang over the world’s top central bankers when they meet in Sintra, Portugal, next week: Is the monetary system centred on the U.S. currency beginning to unravel?
The central bank heads of the United States, the euro zone, Britain, Japan and South Korea will also have a chance to give their views on how global trade tensions and war in the Middle East are affecting the outlook for inflation and growth at the European Central Bank’s annual get-together.
But with inflation seemingly under control in most countries, the much deeper issue likely to permeate their discussions is: Could U.S. President Donald Trump’s protectionist and unpredictable economic policies bring an end to the system that has ruled global finance for 80 years?
“Like everybody else, they are struggling to figure out what kind of world we’re heading into,” said BNP Paribas chief economist Isabelle Mateos y Lago, who will also attend the forum in the picturesque hill town near Lisbon.
“They’ve probably realised we’re not going to get any answers anytime soon. And so the question is: How do you run monetary policy in that kind of environment?”
Investors will hope to get some clues when Fed chair Jerome Powell, ECB President Christine Lagarde and the governors of the central bank of Japan, Britain and South Korea sit down for a panel discussion at the ECB’s Forum on Central Banking on Tuesday.
Among them, Powell will probably be in the hottest seat. He has been under intense pressure from Trump to cut interest rates but he has so far resisted.
Any sign that the Fed’s independence from the White House is under threat could erode the dollar’s status as the world’s currency of choice for trading, saving and investing.
With his position bolstered by a recent U.S. Supreme Court ruling, Powell is likely to stick to his guns. But he faces an increasingly divided Federal Open Market Committee.
Trump may also name Powell’s successor well before his term expires next May, potentially undermining Powell’s message.
“A successor perceived by the market to be more open to accommodating Trump’s wishes…risks damaging the independence of the Fed in setting policy,” economists at Investec wrote.
These fears have driven the dollar down to an almost four-year low of $1.17 against the euro in recent months.
EURO’S MOMENT?
ECB President Christine Lagarde will be in a relatively novel position for any chief of the euro zone’s central bank: promoting the single currency as a bastion of stability.
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